Death tax

02/13/2013

Over the past several years, we’ve seen estate taxes go through many alterations.
We’ve seen changed exemption amounts, a one-year repeal, and “band-aid” fixes
to name a few. In fact, the only thing certain about the federal estate tax was
its uncertainty.

Until now.

Congress finally gave us permanent
estate tax rules; and by permanent, I
mean that except for a built in inflation factor for the estate and gift
exclusion, the provisions don’t expire or change with the passage of time.

Interestingly, despite its potentially onerous tax bite, the federal
estate tax remains largely a voluntary tax. As Forbes points out in a recent column, “Want to Avoid the Estate Tax Cliff? Five Ways to
Help,” the new provisions still allow savvy planners to substantially
reduce, or even eliminate, federal estate taxes -- even on estates that far
surpass the $5.25 million exemption.

Forbes goes on to list five powerful strategies for reducing federal estate taxes:

Gifting. The new provisions allow you to make
tax-free lifetime gifts up to an amount equal to the federal estate tax
exemption, currently $5.25 million. Straightforward gifting of assets while you
are alive removes them -- and their future growth or appreciation -- from your
estate tax-free.

Discounting. There are still a myriad of techniques that
can be used to discount the value of stock for transfer purposes. These
techniques center on lack of control/minority interest and/or lack of
marketability, and can create a substantial valuation discount.

Loans. Family business owners can take advantage of historically low
interest rates for loans used to execute sales of stock. As Forbes points out, “currently, a parent can sell shares of the family-owned business to the
child for a fixed long term interest rate as low as 2.52%, and not incur a gift
tax because of the loan rate.”

Insurance. Properly purchased and owned, life
insurance can be used to provide the cash needed to pay any federal estate
taxes that may remain after other planning strategies are exhausted. Remember,
the cash-call on federal estate taxes is due within nine months of the business
owner's death.

Charitable Giving. If the family is not interested in the
business, but is interested in the wealth it has generated, a charitable gift
of a business interest may be a savvy way to dispose of the business while also
saving on taxes. As Forbes points
out, “there are still a number of
tax-smart ways to transfer the business to a nonprofit organization, and
fulfill your estate planning goals.”

What we love about the new estate tax rules is their permanence, but
what we don’t like is their sting -- in the form of 40 percent on the first
dollar over the exemption amount (currently $5.25 million). Be sure to plan
wisely for your estate tax liability, or risk being “stung” by the rules.